'Slowdown spill over to January-March quarter'

Nomura says transaction demand to stabilise by March

India’s growth momentum witnessed a recovery in January but it is not broad-based and overall economic activity remains below pre-demonetisation levels, says a Nomura report.The slowdown that started in the October-December quarter of 2016, post the demonetisation is spilling over into the first quarter of 2017 (January-March).

“Overall, Nomura’s economic heat-map and proprietary indices indicate that activity has weakened  in December and, while January looks incrementally better, it is not yet broad-based and activity remains below pre-demonetisation levels,” Nomura India Chief Economist Sonal Varma said in a research note.

The report further noted that the process of remonetisation appears to be progressing well and transaction demand is expected to stabilise by the end of March. “Currency in circulation stood at 7.2% of GDP as on February 10, up from a low of 5.9% on January 1 and we expect a ratio of close to 9% by the end of March, which should help stabilise transaction demand,” Varma added.

Nomura expects GDP growth to slow from 7.3% in third quarter (July-September) of 2016 to 6% in Q4 (October-December) and to 5.7% in Q1 (January-March) 2017.

Moreover, growth is expected to bounce back to an average of 7.5% in the second half of 2017 and 7.7% in 2018, driven by lower lending rates, pay hikes for state government employees and higher government spending on rural and infrastructure sectors.
Nomura expects inflation of around 4% to 4.5% in the first half of 2017 before rising to a much higher 5.5% to 6% in second half of 2017.

“For now, we expect rates to be left unchanged throughout 2017, but with the inflation target set at 4% — which we do not believe will be achieved in 2017-18 — and global factors also adverse, we see the probability of a rate hike as low but rising,” it added.